James C. Foster
Chairman, President and Chief Executive Officer at Charles River Laboratories International
Good morning. I'm very pleased to speak with you today about our third quarter results. Our solid financial performance was highlighted by a 15.3% organic revenue growth and non-GAAP earnings per share of $2.63, both of which exceeded our prior outlook. Third quarter organic growth rate accelerated 580 basis points from the second quarter level due primarily to the DSA segment, which delivered an outstanding growth rate to more than 20%, in line with our outlook since the beginning of the year. The DSA growth acceleration reflects continued robust price increases and meaningfully higher study volume in the Safety Assessment business, trends which have been supported by the strength of its backlog that continues to afford us with excellent visibility into the future client demand.
The strong operating performance against the backdrop of escalating macroeconomic pressures demonstrates the power of our unique portfolio which differentiates Charles River from other companies that provide R&D support services to the biopharmaceutical industry, especially from the late-stage clinical service providers. We are uniquely positioned as the leading global nonclinical drug development partner, working with clients from discovery and early-stage development through the safe manufacture of life-saving therapies. Our focus is centered on preclinical R&D which requires extensive scientific knowledge and the ability to innovate, understand and distinguished viable molecules from those that are not. Post pandemic, we are even more -- an even more essential partner to our biopharmaceutical clients because our core competencies are precisely tailored to their intensified focus on scientific breakthroughs, personalized medicine and speed-to-market.
With a comprehensive portfolio spanning small molecules, biologics and cell and gene therapies, we provide a flexible and efficient platform that accelerates early-stage biomedical research and therapeutic innovation. We are a leading global partner for outsourced discovery and regulated safety assessment services. We are also the largest provider of small research models and associated services that enable our clients to conduct their own research, and we offer a comprehensive portfolio of manufacturing solutions from quality control testing solutions to the production of cell and gene therapies that enable us to continue supporting our clients as they work with other providers to conduct human clinical trials and reach commercialization. We have a large and diversified client base which makes us an exceptional barometer for the health of the broader biopharmaceutical industry.
And unlike clinical providers, greatly reduces our reliance on a small group of clients. We have worked with more than 2,000 biopharmaceutical clients this year, and our top 25 clients are primarily large biopharmaceutical clients that are well-financed and have been a stable source of sustained revenue growth with accelerated spending in the third quarter. Our top 25 clients represented only 28% of total revenue last year, and our largest client represented just above 3% of total revenue. We also believe that our biotech clients will remain a sustained growth engine for Charles River. We have averaged adding more than 400 new biotech clients per year since 2017 and are already above that level this year. Our biotech clients continue to be a principal driver of revenue growth, increasing at healthy double-digit growth rates in the third quarter and year-to-date, a trend that we believe supports our view that biotechs with promising molecules are continuing to find available funding. In addition, we saw early indications of the return of IPOs and secondary offerings in the third quarter.
Venture capital funding remained very healthy and large pharma continued to support the biotech industry. Our concentration of at-risk biotech remains low at approximately 5% of both DSA and total revenue for public biotechs with less than two years of cash on hand. This is slightly below our prior estimate, which evaluated DSA backlog. We believe the early-stage research that we conduct is instrumental in our biotech clients' achievement of the important milestones that enable them to secure their next rounds of funding. And therefore, we believe they view continuing the regulated safety assessment programs as critical to their continued success. The total cost of the safety assessment program is a fraction of the cost of clinical trials, typically ranging from $6 million to $8 million including post-IND studies. Yet it is an important milestone to demonstrate that clients' efforts are driving innovation and validating the efficacy and safety profile of their lead compounds.
At five to 10 times less than the cost of clinical trials, biotech clients are motivated to plan their spending around the achievement of IND approval before seeking additional funding or finding a larger biopharmaceutical partner to move into clinical trials. As a result of the importance, both biotech and larger biopharma clients are continuing to move their regulated safety assessment programs through their pipelines. I will now provide additional highlights of our third quarter performance. We reported revenue of $989.2 million in the third quarter of '22, a 10.4% increase over last year. Organic revenue growth of 15.3% exceeded our prior outlook of at least low double-digit increase. All three business segments reported solid revenue growth, particularly the DSA segment, due to the robust performance of the Safety Assessment business.
The operating margin was 20.4%, a decrease of 100 basis points year-over-year. The decline was driven by lower margins in the Manufacturing and RMS segments as well as higher unallocated corporate costs, both of which were previously anticipated. Earnings per share were $2.63 in the third quarter, a decrease of 2.6% from the third quarter of last year. Higher revenue was offset by the operating margin decline, increased interest expense and a higher tax rate. Based on the third quarter performance, we are narrowing our 2022 revenue growth and non-GAAP earnings per share guidance to the upper ends of the previous ranges. We expect organic revenue growth in the range of 11% to 12% and non-GAAP earnings per share of $10.80 to $10.95. I'll now provide details on the third quarter segment performance, beginning with the DSA segment. Revenue for the DSA segment was $619.5 million in the third quarter, a 20.8% year-over-year increase on an organic basis.
The DSA growth rate surpassed the 20% level, tracking to our initial plan that had forecast meaningful DSA growth acceleration throughout the year. The exceptional demand, which has manifested itself in sustained backlog growth is a function of our clients' robust pipelines, our competitive strengths and the scientific breadth and geographic reach of our portfolio. Broad-based growth in the Safety Assessment business was the principal driver of the nearly twofold increase in the DSA revenue growth rate from the second quarter level. The factors that led to this meaningful step-up were substantially higher study volume and continued meaningful price increases. Study volume was a significant contributor, driven by strong demand across the Safety Assessment business for most major study types of general and specialty toxicology. As expected, study volume rebounded meaningfully from first half levels, and we were able to accommodate additional client demand as a result of having hired and trained additional staff over the last year.
We are continuing to successfully recruit and retain staff to support future growth and do not foresee challenges with staffing levels as we head into next year. Pricing also continued to trend meaningfully higher year-over-year and sequentially, which we believe reflects the complexity and specialized nature of the work we do. Today's inflationary cost environment and the fact that capacity remains well utilized. Although pass-throughs are higher costs for certain study-related resources that are passed directly to clients were higher in the third quarter. They accounted for less than half of the sequential step-up in the Safety Assessment growth rate and had effectively no margin impact. Pricing, exclusive of the impact of pass-throughs, increased broadly in the third quarter. Clients continue to emphasize the breadth of capabilities, study lead times and the availability of space more so than price when determining the preferred partner for their preclinical programs.
As the premier partner for our clients' nonclinical development programs, it's not surprising that clients are continuously choosing to work with Charles River for our broad and scientifically differentiated portfolio, superior client service and speed as we aim to take an additional year out of the early-stage development timelines. As expected, the Discovery Services growth rate moderated in the third quarter, primarily due to the lengthening of clients' decision-making time frames to start new projects, a trend which we discussed in August. We believe the Discovery business will demonstrate favorable long-term growth prospects as many of our clients, including biotechs, prefer to outsource their drug discovery projects rather than maintain in-house infrastructure. And given the critical importance of the early-stage research in which they are engaged, they prefer an integrated full-service partner like Charles River.
We continue to expect mid-teens DSA organic revenue growth in 2022. DSA backlog and booking activity through the third quarter continues to support sustained growth. And for next year, we have a significant amount of safety assessment work already booked. The strong Safety Assessment performance has been under the leadership of Shannon Parisotto. Shannon has been with the company for over 20 years, starting at our Nevada site shortly after it became our first acquisition in the Safety Assessment space. With significant operational and finance experience, Shannon recently assumed responsibility of our Discovery Services in addition to Safety and was promoted to an Executive Vice President. I would like to congratulate Shannon and wish her continued success in driving the long-term growth of our Global Discovery and Safety Assessment segment.
DSA operating margin increased by 190 basis points to 26.2% in the third quarter, driven primarily by operating leverage from the substantial quarterly increase in Safety Assessment study volume and pricing. RMS revenue was $180.1 million, an increase of 8% on an organic basis over the third quarter of 2021. The RMS business continued to sustain high single-digit growth, consistent with our outlook for the year. The RMS growth potential has trended upward recently from low to mid-single digits several years ago due to a combination of accelerating growth for Research Model Services and Research Models. The CRADL initiative, or Charles River Accelerator and Development Labs including a recent Explora acquisition, is a significant driver of the growth rate increase. In addition, our renewed focus on biomedical research has led to increased demand and share gains for small research models, particularly in North America and China.
We are also benefiting from meaningful price increases, in part to offset inflationary cost pressures. These factors were the principal drivers of RMS revenue growth in the third quarter. In the Research Models business, North America continued to generate strong revenue growth and China rebounded following the impact from COVID-related restrictions in the second quarter. There was no meaningful impact on client order activity from COVID-related restrictions in the third quarter. We are also continuing to expand in China outside of Beijing and Shanghai regions to gain additional market share and believe the level of biomedical research activity, coupled with our expansion plans in China, will continue to generate robust double-digit growth in the region. Research Model Services also had another excellent quarter, led by the Insourcing Solutions business, particularly our CRADL and Explora operations.
Clients are increasingly adopting this flexible model to access laboratory space without having to invest in internal infrastructure. Explora has continued to perform very well with the integration on track. We added five new sites over the last six months in California and Washington state and now operate 27 vivarium facilities totaling over 370,000 square feet of turnkey rental capacity. CRADL and Explora provides us with a new and unique pathway to connect with clients at earlier stages, enabling these clients to easily access additional services across our comprehensive discovery and nonclinical development portfolio. In the third quarter, the RMS margin declined by 260 basis points to 23.5%, driven primarily by the revenue mix and higher costs in China due in part to our regional expansions.
We also experienced a modest margin impact from opening new CRADL and Explora sites this year for which the profitability will improve as client utilization increases in the newly opened sites. Revenue for the Manufacturing segment was $189.6 million, an increase of 6% on an organic basis. Lower revenue in the CDMO business, the drivers of which we discussed last quarter, was more than offset by higher growth rates for both the Biologics Testing and Microbial Solutions businesses. The growth prospects for these legacy manufacturing quality control businesses remain robust, and they will continue to be principally driven by demand for biologic drugs, including cell and gene therapies, and other complex biologics. Microbial Solutions benefited from broad-based growth across Endosafe endotoxin testing and Accugenix microbial identification testing platforms.
We are continuing to convert the marketplace to our more efficient and reliable quality control testing platform. The continued expansion of the installed base of instruments drives demand for the consumable cartridges and reagents which provides a healthy recurring revenue stream. The Biologics Testing business also had a strong quarter with virology, viral clearance and microbiology testing services driving growth in both the U.S. and Europe. Demand for traditional biologics remains strong, but cell and gene therapy clients are driving a disproportionate amount of recent growth. We have been continuing to add capabilities to our extensive portfolio to support the manufacture of biologics, including the addition of new cell and gene therapy assays. The initiatives that we have implemented to improve the performance of our CDMO business are beginning to gain traction and earn positive feedback from clients.
It's still early, and we don't expect the financial performance to meaningfully improve until next year, but we're pleased with the initial progress. Our creation of Centers of Excellence for cell therapies, viral vectors and plasmids has been well received. And coupled with our focus on CDMO business development efforts, we are generating new client interest. We recently announced a gene therapy manufacturing partnership with Nanoscope Therapeutics to produce plasmid DNA and viral vectors for their late-stage clinical trials of a therapy targeting degenerative ocular diseases. We have a number of other clients who are in late-stage clinical trials with their cell or gene therapies, and we are investing in our sites to ensure that we are commercially ready should our clients receive regulatory approval.
As we mentioned last quarter, our Memphis cell therapy site received European approval from the EMA to commercially manufacture cell therapy products. We continue to believe in the long-term growth prospects for cell and gene therapies and are enhancing our service offering to generate new business and provide incremental opportunities for clients to streamline their biologics development workflows by utilizing Charles River for their analytical testing, process development and manufacturing activities. The Manufacturing segment's operating margin declined by 410 basis points to 28.6% in the third quarter of 2022. And similar to the second quarter, it was almost entirely driven by the CDMO business.
As we announced this morning, we have signed an agreement to divest our Avian Vaccine business, which is part of our Manufacturing Solutions segment for approximately $170 million in cash plus potential contingent payments of up to an additional $30 million. We routinely evaluate the strategic fit and fundamental performance of our global infrastructure. And as we did at this time last year, have sold or closed operations that did not meet our key business criteria. The decision to divest the Avian business was consistent with this evaluation process as we determine the production of SPF eggs principally for Avian Vaccine manufacturers and researchers was no longer a core competency. Flavia will provide additional details on the financial impact of this transaction. We are confident that we will finish the year on a strong note and are encouraged by the solid growth prospects as we head into the new year.
The economy will present challenges in the coming year, but we believe we are well positioned to meet these challenges and continue to deliver exclusive science, superior client support and greater efficiency to our clients. Our focus in recent years on enhancing our capabilities in biologics and cell and gene therapies, investing in our people and space and continuing to build greater digital connectivity with our clients has further differentiated us from the competition and enabled us to forge even deeper relationships with our clients. We are the bridge between the biopharmaceutical industry and patients that enables innovation to move forward and we will continue to distinguish ourselves scientifically and through our preclinical focus. To conclude, I'd like to thank our employees for their exceptional work and commitment and our clients and shareholders for their support.
Now Flavia will provide additional details on our third quarter financial performance and 2022 guidance.